IRR in the CFA text (Easy Question)

[liquid]

So I understand the IRR in theory (obviously very simple), but I'm struggling to understand the example on page 246-247 of the text. Any help would be appreciated.

Thanks.

CF for T0 = -200
CF for T1 = -220
CF for T3 = 480

How is that wrong?

I know this will be one of those situations, where my head will just ding... *duh*

 

[bigwilly]

What do you mean how is that wrong?? You have an initial Cash Outflow at time 0 of $200, then at time 1 you have a negative cash inflow (or a cash outflow) and in year 3 you have a positive cash inflow. The IRR would simply be 9.39%. Now if you discount each cash flow by 9.39% (you would not discount CFo b/c it is already at PV) your NPV would be zero.

So in all if you earn a rate of return above 9.39% you would have a positive NPV and if you earn a rate of return below the 9.39% you would have a negative NPV.

 

[bigwilly]

Whoops I just realized my mistake and the edit button is gone. If you rate of return is above 9.39% you would have a NEGATIVE NPV and if your required rate of return is below 9.39% then you would have a POSITIVE NPV. I realized my mistake after writing it and I didnt see the edit button. Sorry for the confusion .